The autumn IPO rush on both sides of the Atlantic shows no sign of abating with the news Tencent, the Chinese internet giant, has filed the paperwork for a U.S.-based IPO of its Tencent Music Entertainment (TME) streaming unit. Tencent Music Entertainment is currently under the broad umbrella of Tencent Holdings, the social media, gaming and payments conglomerate focused on mobile as a platform. Tencent rose to prominence through WeChat, the most popular messaging app in China.
The IPO of TME has been widely expected by the market but yesterday’s filing confirms the move. An initial ‘placeholder’ IPO raise of around $1 billion has been made public by Tencent but analysts expect that the eventual IPO will target closer to $2 billion in investment capital raised, at an overall valuation of $30 billion. TME is China’s largest music streaming service and with 800 million unique users is also one of the world’s biggest. The unit is also, in a break from recent tech IPOs, especially those coming out of China, profitable. Tencent’s regulatory filings show $263 million was generated over the first 6 months of this year.
Back in May when a TME IPO was first mooted for this autumn, a target raise figure of $4 billion was put forward. While it looks like the eventual sum will be at least half of that, the overall target valuation of the spin-off remains steady at $30 billion, meaning the number of shares sold off to those investing online and institutional investors will simply be less. It remains to be confirmed if the IPO will include a retail offering but consumer facing tech companies do often offer users the opportunity to invest.
There is an interesting tie-up between TME, which is the music streaming market leader in China, and Spotify, the market leader in the U.S. and other Western markets such as Europe. A stake swap last year gave Tencent, through TME, a 7.5% holding in its NYSE-listed peer. At the time the deal valued TME at $12.3 billion, suggesting an more than doubling of value in the year since.
The Tencent Music Entertainment IPO will not be the first time Tencent Holdings has spun-off a unit it believes has greater market potential as a stand-alone company, though previous examples have led to listings in either China or Hong Kong and not Wall Street. Last November Chinese Literature, an ebooks start-up, raised $1.1 billion through a Hong Kong-based IPO. IPO investors in the company raked in massive on-paper profits during a first day of active trading that saw its IPO share-price surge 80%. Last month food delivery company Meituan Dianping, that counted Tencent as its majority backer, raised $4.2 billion from an IPO that valued it at $53 billion.
However, not every Tencent spin-off has met with the same success. Perhaps slightly worryingly, the most recent U.S. IPO the company was involved in, that of electric car start-up Nio, raised only $1 billion of an initial $1.8 billion target. The parent company’s share price is also down 24% over the year-to-date, affected by the wider conditions of a struggling Chinese equities market and proposals from the Chinese government to place controls over video game releases, from which the majority of Tencent’s revenues are still generated from. The proposal is the result of concerns children in China are spending too much time online and watching screens.